EACH YEAR, Global Economic Prospects explores critical “here and now” economic developments relevant to low and middle-income countries. Past editions have examined the sustainability of developing country growth over the long term, importance for developing countries of international and regional trade liberalization, and migration and remittances. Last year’s report looked at the pace and determinants of technological diffusion in developing countries. This year’s Global Economic Prospects finds the global economy at a crossroads, transitioning from a sustained period of very strong developing country–led growth to one of substantial uncertainty as a financial crisis rooted in high-income countries has shaken financial markets worldwide.
Commodity markets too are at a crossroads with the very high prices of 2007 and early 2008 having fallen by more than half in many instances. Great uncertainty surrounds the implications of this crisis for developing countries. Initially, the repercussions for developing countries of the financial turmoil that characterized 2007 and the first half of 2008 were limited.
However, since September 2008, the intensification of the banking crisis, the collapse of several global financial players, and the sharp increase in emerging market bond spreads have dramatically altered the outlook for developing countries. These events constitute the kind of disorderly adjustment that has been discussed in previous reports as a risk. Materialized, it implies a sharp slowdown for developing countries and the possibility that serious crises may emerge.
While the measure of that slowdown and its near-term implications for growth and incomes are important, governments in developing countries also need to be mindful of the longer term implications of their policy response. Thus, while countercyclical policy may help reduce the short-term costs of the slowdown, care must be exercised to react prudently so as not to endanger longer-term fiscal sustainability and growth prospects. For as serious as the coming slowdown may be, developing-country growth is expected to recover after the crisis is over.